Getting referrals is quite lucrative and a good businessman knows that there is a “cost of acquisition of new clients” and this must be cost into the business if they want it to be a sustainable long term arrangement. It is far better to create a garden that attracts butterflies forever versus you personally catching butterflies with a net.
A referral fee is a good way to incentivize a referral partner to continue to refer more clients.
When it comes to the fee that should be paid to the referrer, I’d pay a percentage of the fee generated in the first year and after it’s been paid.
If you can use your existing resources to do the work then the profit for each referred new client is 100% profit. You should be prepared to pay a percentage of this to the referrer, maybe around 50% as a one-off fee because it costs 100% (i.e: dollar per dollar to buy new fees from someone who is selling their Practice).
Alternatively, you can also pay 100% of the fee but payable over 2 years after the fee has been collected. Remember to keep a spreadsheet of what has and hasn’t been paid. If they don’t come back the second year then the fee stops at 50% of that first year.
If you need to hire new staff to do the work then the percentage would be lower as you need to account for COGS but the Fixed overheads will be very little. So maybe between 20% and up to 50% (assuming COGS is 40% which leaves a Gross Profit of 60% as fixed overheads are negligible)
The above is what I would be happy with because in addition to the lifetime value of a client (which is 5 years or more), there is also a goodwill figure for each new client that comes on board at dollar per dollar of fees.
Getting referrals really starts with getting more face to face time with the clients and the best way to do this is to speak to the clients about their results and not just send the completed work to the clients.
For small clients, ask your Senior Client Managers to NOT send out tax returns for signature but to speak to clients about their results. For large clients, you can call them for a tax planning meeting prior to finishing their work, to take them on the journey instead of just completing their work and sending it to them in the post/email.
You will notice that the SCM’s who do this have higher NPS scores and with higher NPS scores, they can have higher numbers of Referrals from their clients.
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